Won’t the high win rate of your strategies be cancelled out by the poor risk to reward ratio?

Won’t the high win rate of your strategies be cancelled out by the poor risk to reward ratio?

Won’t the high win rate of your strategies be cancelled out by the poor risk to reward ratio?

Written by Eli Grelecki Updated over a week ago

That’s actually a very common question we get. Most tend to forget that win rate/probability of profit is directly tied to risk vs reward, but it seems like you already know that. You are correct - until you can find an imbalance between the 3 (risk, reward, and win rate), enough of one to outweigh commissions and the bid/ask spread, then you won’t have trading success.

Our high probability option strategies are the only way we’ve been able to achieve this… When we take a trade that has a risk of $700, a reward of $300, and a probability of success of 70% (perfectly aligned with the risk vs. reward), but we have an 80% win rate or higher, that’s where we’ve found our edge.

If you feel you’ve found another way to achieve this imbalance between your win rate, risk, and reward - that’s great! But we highly encourage you to make sure you have plenty of trades under your belt with that strategy to determine that the imbalance is accurate. Make sure you try to eliminate all the variables when making this decision. For example, if you’ve taken profits quicker on even just a few trades without letting it fully run to the profit target, then that will skew your win percentage. Or if you even occasionally double down on a position or allow the loss to run a little further than originally planned, that will also skew your win percentage. But the fact is, if you do that, then your payout on those trades was cancelled out by the lower payout…

The reason WE trade options is because we believe it is impossible for directional trades to have a win rate of better than 50% if you have a risk : reward of 1 to 1. We’ve conducted years of research that suggests we are correct in this theory.

If you have found a way to do it, congrats! Because we have definitely not found a way to do it. Therefore, we lean towards trading options. Options are like insurance for an investor, and insurance is overpriced in every area of life. The options market is no exception. That’s where we find our edge… The real risk is generally less than perceived risk, which means options are generally overpriced so if you take an options trade with a 70% probability of success, you’ll have a win rate that is higher than that.